Lettuce remember: One year on from Liz Truss’ disastrous mini-budget

On September 23, 2022, then-Chancellor Kwasi Kwarteng got to his feet in the House of Commons.

Unveiling policies on investment zones and industrial action, and cutting – among others – income, corporation and dividends tax, it was the biggest revenue-slashing budget since 1972, the Institute for Fiscal Studies said.

But having failed to brief the City, consult the Office for Budget Responsibility (OBR), or, frankly, explain exactly what spending was going to be cut to pay for it all, it prompted panic.

Market meltdown, soaring gilt yields, a falling pound, and spiralling mortgage costs. Kwarteng was soon sacked, and Truss was eventually forced to resign after just 49 days in office.

But as the dust settled, with Jeremy Hunt and Rishi Sunak installed in their places, the UK’s and the Tories’ malaise – from sluggish productivity to languishing behind Labour in the polls – has continued.

One year on, City A.M. takes a look at the fallout from the mini-budget and asks whether she still has the ability to influence the Conservative Party going forward.

Gilt yields

“If Truss and Kwarteng were in power today and announced a budget like they did last year, then it’s likely that gilt yields would surge again… because markets thought their plans lacked credibility.”

Andrew Goodwin, chief UK economist at Oxford Economics

A recurring refrain from Liz Truss’s supporters is that gilt yields are higher now than they were in the immediate aftermath of the mini-budget. 

They argue the steady rise in yields under Sunak has received much less commentary than the surge seen last Autumn, when critics said Truss was having to pay a ‘moron premium’.

Last autumn, after the government announced tens of millions in unfunded tax cuts, investors concluded – not unreasonably – that UK government debt was not as reliable as it had been before the tax cuts were announced. 

However, as the Trussites like to point out, yields surpassed the mini-budget peak in May this year after new data showed that inflation was stickier than many economists had predicted. 

This is true, but it is not the same.

Dan Hanson, economist at Bloomberg Economics, said October’s surge “signalled a loss of confidence in the UK”. 

Yield prices now, however, reflect the fact that the economy has performed stronger than expected and inflation has remained stickier. The move higher in yields is a “rational response” to the current situation, Hanson said, not a total loss of confidence. 

As Andrew Goodwin, chief UK economist at Oxford Economics, put it: “If Truss and Kwarteng were in power today and announced a budget like they did last year, then it’s likely that gilt yields would surge again… because markets thought their plans lacked credibility.”

Value of the pound

Although yields are back above their mini-budget peak, the pound is now much stronger than the depths it slumped to last autumn.  

Then, the pound approached parity with the dollar as international investors abandoned the UK putting downward pressure on sterling. 

Since then it has recovered and, until relatively recently, was the one of the strongest performing currencies this year.  

Its strength can partly be attributed to the stubbornness of inflation in the UK, which has forced the Bank of England to lift rates higher than many international peers. 

But it also should be remembered that markets were expecting interest rates to rise as a direct result of Truss’s proposals, which many critics allege would have fuelled inflation.

The pound’s performance therefore also reflects the perspective that the current government is more sensible. 

“Sterling’s recovery reflects the more credible direction of fiscal policy since Jeremy Hunt took over at no. 11, both from the perspective of a less inflationary stance but also in terms of fiscal sustainability,” Phil Shaw, chief economist at Investec, said.

Supply side

One of Truss’s main selling points was that she promised to implement a meaningful set of supply-side reforms.

Reforms to boost the supply-side have become increasingly popular in a world in which the major constraint on growth is not a lack of demand, as had been the case post-financial crisis, but a lack of productive capacity. 

In this context, her package of tax cuts and promise of deregulation had some appeal. But as Goodwin pointed out, “cutting taxes alone is not a credible supply-side plan”. 

Still, her supporters would argue that the proposals in the mini-budget are a better plan than the current inaction on supply-side reform. 

A fairly limited set of incentives to boost participation in the labour market is about the only measure Sunak’s government has taken to boost the productive capacity of the UK economy. 

So the challenge remains: how can the UK reform its supply-side, thereby increasing its growth rate?

Shaw suggested that the government needs to tackle the rise in long-term sickness, which currently prevents 2.8m people from working. 

Hanson also suggested that the market would be “unlikely” to punish a plan focusing on promoting private investment, such as by making the tax deduction on capital expenditure permanent.

Impact on the Tories

“I’m afraid Liz going around making speeches at the moment isn’t helpful to anyone.”

One backbench Conservative MP told City A.M.

While gilt yields and the value of the pound may have proved surprisingly resilient, Truss’ has had a serious impact on the fortunes of her party.

Some Conservative MPs are worried that her recent press appearances are making things worse.

“She made a number of disastrous mistakes,” one backbench Conservative MP told City A.M. “I’m afraid Liz going around making speeches at the moment isn’t helpful to anyone.”

Not everyone agrees, however. Another more senior Tory MP claimed Truss’ premiership was “very much a Westminster bubble issue”.

“Obviously her actions have had consequences for thousands of families up and down the country, with their mortgage rates… but I don’t think she’s really entered the nation’s psyche,” they said.

Ideas vs execution

“In the eyes of many people she’s poisoned the idea that you can reduce taxes in this country, and that is a great pity. She’s kind of poisoned the well.”

The backbench Tory MP told City A.M.

For many Tories, the ideas that lay under Truss’ erratic bout of leadership; lower taxation, a smaller state, and a growing economy; are central to their sense of political, if not personal, identity.

Her supporters are still preaching the growth gospel to the believers of Westminster, and the prime minister even opted to make economic growth the second of his five pledges.

“She made the right calls,” one Westminster insider claimed. “I don’t think anyone thinks she’s wrong. What is coming out of Rachel Reeves’ office, it’s about growth”.

“It was a case of, she shocked the markets because she acted too quickly. But she was trying to do it for what I would say to be the right reason,” they added.

The backbench Tory MP said Truss’ time at the top was “a great tragedy” for the ideas she championed because of “the mess she made of it”.

“In the eyes of many people she’s poisoned the idea that you can reduce taxes in this country, and that is a great pity. She’s kind of poisoned the well,” they said.

‘Not a hope in hell’

What is clear though, is an apparent consensus against Truss getting a second chance.

“She would probably think so,” the senior Tory MP told City A.M. “But I can guarantee she hasn’t got a hope in hell.”

Her colleagues recognise she lacks key traits required: personality, leadership, communication. But Truss herself, and her allies, continue to beat the drum for her message. So what does her future hold?

“I think she knows the game’s up,” the political insider source told City A.M.

But they added she will still have influence over the Conservative Party going forward because there is still a large group of Tory MPs that believe she was forced out. “I think she’ll take a more backseat role, but an influential backseat driver,” they said.

But whether she is able to return to the frontline of the party or not, it’s clear what she’ll be calling for.

“I think Liz will carry on arguing for what she believes in, which is lower taxes, smaller state, higher economic growth,” the backbench Tory MP said. “I think she’ll now see that as her purpose.”